Monopoly Power and Expense-Preference Behavior: Theory and Evidence to the Contrary

Michael Smirlock and William Marshall

Bell Journal of Economics, 1983, vol. 14, issue 1, pages 166-178

Abstract: The expense-preference theory of the firm implies that in noncompetitive product markets, managers hire labor beyond the profit-maximizing level. This theory has recently received empirical support from Edwards (1977) and Hannan and Mavinga (1980). In this article it is shown that for expense-preference behavior to exist, the effectiveness of the technology for conflict control between shareholders and managers must be related to market structure, which is a tenuous proposition. Further, once differences in monitoring costs due to variation in firm size are controlled for, the empirical evidence supports managerial profit-maximizing rather than expense-preference behavior.

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